Welch v. Synovus Bank

• Decision Date: 25 June 2014
• Docket Number: No. 8:14–cv–187–T–33AEP.,8:14–cv–187–T–33AEP.
• Parties: Angela WELCH, as Chapter 7 Trustee for the bankruptcy estate of Frank Michael Mongelluzzi, Plaintiff, v. SYNOVUS BANK, Defendant.
• Court: U.S. District Court — Middle District of Florida

517 B.R. 269

Angela WELCH, as Chapter 7 Trustee for the bankruptcy estate of Frank Michael Mongelluzzi, Plaintiff

v.SYNOVUS BANK, Defendant.

No. 8:14–cv–187–T–33AEP.

United States District Court, M.D. Florida, Tampa Division.

Signed June 25, 2014.

Eric Rayman, Robert F. Elgidely, Genovese, Joblove & Battista, PA, Ft. Lauderdale, FL, Jesus M. Suarez, John H. Genovese, Michael A. Friedman, Genovese, Joblove & Battista, PA, Miami, FL, for Plaintiff.

Charles Franklin Ketchey, Jr., Trenam Kemker, Tampa, FL, for Defendant.

ORDER

VIRGINIA M. HERNANDEZ COVINGTON, District Judge.

This matter comes before the Court in consideration of Defendant Synovus Bank's Motion to Dismiss Complaint (Doc. # 18), filed on March 4, 2014. Plaintiff Angela Welch, Chapter 7 Trustee for the bankruptcy estate of Frank Michael Mongelluzzi (Trustee), filed a response in opposition to the Motion on April 4, 2014. (Doc. # 25). With leave of Court, Synovus filed a reply to the Trustee's response (Doc. # 29) on April 18, 2014, and the Trustee filed a surreply (Doc. # 37) on May 2, 2014. For the reasons that follow, the Motion is denied.

I. Allegations of the Amended Complaint¹

A. Factual Background

From 1986 to 2010, Frank Mongelluzzi and his wife Anne Mongelluzzi owned and operated several temporary labor staffing companies to which the Amended Complaint refers collectively as the “Able Body Labor Businesses.” (Doc. # 17 at ¶¶ 7–8). The Able Body Labor Businesses were headquartered in Clearwater, Florida, had 170 office locations in 25 states, and generated over $200 million in annual revenues between 2004 and 2009. (Id. at ¶ 9). In addition to these staffing companies, the Mongelluzzis maintained various other personal and business interests, including ownership of restaurants, construction companies, pawn shops, residential and commercial real estate holdings, aircraft, and yachts. (Id. at ¶ 11). According to the Trustee, these “Non–Staffing Businesses were not financially self-sufficient but, rather, relied heavily upon the Able Body Labor Businesses' revenue, loan proceeds, and illicit banking activities.” (Id. at ¶ 12).

The Mongelluzzis and their related business entities maintained “314 bank accounts at approximately 38 financial institutions ..., including 77 bank accounts at Synovus ... in the period 2007 through 2011.” (Id. at ¶ 13). Between March 2008 and September 2010, the Able Body Labor Businesses also had a $35 million asset based revolving line of credit with Synovus (the “Synovus Revolver”) which was personally guaranteed by the Mongelluzzis. (Id. at ¶ 18). The Synovus Revolver “was a vital mechanism for funding the Able Body Labor Businesses' daily working capital needs including the payment of legitimate creditor claims.” (Id. at ¶ 19). The Mongelluzzis and their related business entities also had several real estate, equipment, and other loans with Synovus. (Id. at ¶ 20).

In connection with the administration of the Synovus Revolver and other loans to the Mongelluzzis, Synovus “engaged in rigorous financial oversight of the Mongelluzzis and the[ir] Business Entities by, among other things, (a) conducting an ongoing review of the obligors' operations, performance and prospects; (b) conducting an ongoing review of the obligors' financial statements, assets and liabilities; and (c) performing detailed analysis, examinations and audits of advances, use of loan proceeds, and collateral.” (Id. at ¶ 21).

The Trustee asserts that, “[i]n order to support the operations of the Business Entities, [Frank] Mongelluzzi and others devised and implemented a massive check kiting scheme” using the numerous bank accounts maintained by the Mongelluzzis and related business entities. (Id. at ¶ 23). This scheme allegedly included the Synovus accounts. (Id. ).

The Amended Complaint describes the check kiting scheme as follows:

Basically, [Frank] Mongelluzzi and others continuously issued checks drawn on accounts which lacked sufficient available funds to cover them (the “Check Kite Accounts”) so that they would have access to interest free loans of the fictitious account balances during the float period and thereby hinder and/or delay [Frank] Mongelluzzi's and the Business Entities' creditors in the period 2007 through 2010.

In order to provide cover for their massive check kiting scheme, [Frank] Mongelluzzi and others would then continuously write checks drawn on the accounts of their other affiliated entities (or transfer loan proceeds from the Synovus Revolver) and deposit those checks (or loan proceeds) to the Check Kite Accounts before the float period expired so that the checks would not bounce and thereby cause the revelation and cessation of the scheme.

(Id. at ¶¶ 24–25).

The Trustee alleges that “the loan documents for the Synovus Revolver restricted use of the loan proceeds to the obligors' working capital needs.” (Id. at ¶ 28). “However, Synovus became aware in the period from 2007 through 2010 that [Frank] Mongelluzzi and others systematically transferred loan proceeds from the Synovus Revolver without any apparent justification to and between non-obligor Business Entities and to cover checks issued in connection with the check kiting scheme in violation of the loan covenants and restrictions.” (Id. at ¶ 29). Additionally, the Trustee alleges that Synovus “became aware in the period 2007 through 2010 that [Frank] Mongelluzzi and others were also making payments on the Synovus Revolver with loan proceeds originating from the Synovus Revolver, with loan proceeds obtained from other financial institutions, and with cash.” (Id. at ¶ 30).

The Trustee asserts that “Synovus' actual knowledge of [Frank] Mongelluzzi's intent to hinder and/or delay creditors is evidenced by significant circumstantial evidence,” including Frank Mongelluzzi's or the related business entities':

(a) pattern of writing checks on accounts without sufficient available balances to cover them followed by transfers of funds from accounts of other affiliated entities and use of loan proceeds from the Synovus Revolver in order to cover such checks before the float period expired;

(b) chronically overdrawn accounts;(c) transfer of loan proceeds with no apparent justification to bank accounts of non-obligor affiliated entities which did not appear to have legitimate operations or sources of revenue;

(d) repayment of the Synovus Revolver with loan proceeds from other financial institutions;

(e) nominal cash on hand in relation to existing financial obligations;

(f) cash flow issues;

(g) overly leveraged financial condition;

(h) numerous cash withdrawals of $10,000 each by Professional Staffing—A.B.T.S., Inc., in the period March 27, 2009 through April 16, 2010;

(i) evasion of single entity borrowing limits by permitting the Mongelluzzis to obtain loans for shell entities which did not appear to have legitimate operations or sources of revenues;

(j) material discrepancies and ambiguities in financial reports;

(k) collateral defects and/or deficiencies; and

(l ) material loan defaults.

(Id. at ¶ 32). The Trustee alleges that Synovus continued its banking relationship with the Mongelluzzis and their related business entities despite this circumstantial evidence “so that it could continue to collect substantial fees, charges, interest, and other forms of revenue to the exclusion and detriment of [Frank] Mongelluzzi's and the Business Entities' legitimate creditors.” (Id. at ¶ 33).

Synovus allegedly emailed the Mongelluzzis and others in July of 2010, explaining that, between the existing loan balance and overdraft conditions, the Mongelluzzis had “pushed the bank to $45 million dollars in outstanding debt for company payroll, insurance and operations.” (Id. at ¶ 35(b)). Synovus further advised within the email that “[t]he overdrafts represent an illegal action of writing checks without funds to cover them.” (Id. ).

The Trustee alleges that, “[r]ather than bringing these activities to an immediate halt, ... Synovus implemented a controlled exit strategy to obtain repayment of the Mongelluzzis and the Business Entities' outstanding obligations irrespective of the source of payment and to preserve future revenue through a forced sale of the Able Body Labor Businesses and establishment of a similar banking relationship with the purchaser.” (Id. at ¶ 38).

The alleged check kiting scheme collapsed in the summer of 2010 when several financial institutions closed or froze many of the subject bank accounts and refused to honor checks drawn thereon. (Id. at ¶ 39). In response to this turn of events, Synovus took certain actions against the Mongelluzzis and the related business entities, including refusing to process future advances from the Synovus Revolver, refusing to process outgoing wires, closing or disabling eight corporate accounts, and requiring a pledge of the stock of eighteen of the related business entities in order to collateralize the previously extended general unsecured overdraft loans. (Id. at ¶ 42). However, Synovus allegedly continued to receive substantial transfers from Frank Mongelluzzi and the related business entities “after it obtained knowledge” of Frank Mongelluzzi's insolvency and the alleged check kiting scheme. (Id. at ¶ 44).

Synovus subsequently “exerted substantial pressure on the Mongelluzzis to sell the Able Body Labor Businesses and was actively involved in negotiations for, and the structure of, the ultimate sale of their assets to Michael D. Traina and MDT Personnel, LLC on or about September 2, 2010.” (Id. at ¶ 45). The Amended Complaint explains that “the Mongelluzzis, the Able Body Labor Businesses, Traina, and MDT executed and purportedly closed [an asset purchase agreement] providing for the sale of the Able Body Labor Businesses' assets to Traina and MDT in exchange for a purchase price equivalent to the then current outstanding senior indebtedness of the Able Body Labor Businesses.”² (Id. at ¶ 53). The Trustee characterizes the effect of this asset sale as follows:

In

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